Standing Committee A

[sir john butterfillin the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14 and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Schedule 4

taxation of activities of film production company

Amendment proposed [this day]: No. 40, in schedule 4, page 165 [Vol I], leave out lines 15 to 17.—[Mrs. Villiers.]

Question again proposed, That the amendment be made.

John Butterfill: I remind the Committee that with this it will be convenient to discuss the following amendments: No. 42, in schedule 4, page 165, line 26 [Vol I], at end insert—
‘(1A) Where a company incurs expenditure on the development of a film that is abandoned before pre-production and subsequently begins to carry on a trade as a film production company in relation to another film, the expenditure may be treated as expenditure of the trade of the second film and as if incurred immediately after the company began to carry it on. Provided that the same expenditure is not to be given more than once.'.
No. 53, in schedule 4, page 166, line 19 [Vol I], leave out paragraphs 7, 8 and 9 and insert—
‘7 For the purposes of this Schedule profits and losses are calculated in accordance with generally-accepted United Kingdom accounting principles.'.
No. 55, in schedule 4, page 167, line 4 [Vol I], at end insert
‘; and accordingly—
(a) where, within six years of the end of the first period of account, it becomes clear that the original estimates were incorrect, the film production company can elect in writing to amend the original tax computations to reflect the correct position;
(b) income taxed under the provisions of paragraph 7 of this Schedule shall not be taken into account for tax purposes in a subsequent period of account.'.
No. 41, in schedule 4, page 167 [Vol I], leave out lines 6 to 17.

Edward Balls: I welcome you back to the Chair, Sir John. We had a long debate this morning on a number of the clauses relating to schedule 4, and I was just coming to the end of my remarks. I had referred to all five amendments— amendments Nos. 40, 42, 53, 55 and 41—and I was answering a final question from the hon. Member for Chipping Barnet (Mrs. Villiers) on transfer pricing. I concluded by saying that we did not think that there was anything novel in the situation for transfer pricing that will face the film industry. It will be no different from the normal way in which transfer pricing rules apply. The normal rules will apply and although that may be uncomfortable for those who attempted to use them for tax avoidance reasons, we do not think that there will be a problem to trouble any genuine film makers. On that basis, I ask the hon. Lady to withdraw the amendment.

Theresa Villiers: I welcome a number of points in the Economic Secretary’s response to the debate. I welcome his clear indication that development costs for films that never go into production could be deducted according to ordinary tax law principles. Even if he is not prepared to accept my amendment, which suggests that they should receive the enhanced deduction, it is welcome that they have not accidentally been excluded from the ordinary regime.
I also welcome his reassurance that film production companies will definitely be able to correct estimates if they prove to be incorrect. That was my understanding of what he said. I still have some anxieties as to how that tallies with the Bill’s terms, but his reassurance on that point is welcome.
I take issue, however, with his repeated assertion that what is proposed in schedule 4 is in line with standard industry budget and accounting practice. As I acknowledged in my speech on the amendments, there are some structures that involve special purpose vehicles, where the proposed new framework might not produce a significant burden. However, as the British Screen Advisory Council points out, not all film producers will want to use that model. It states that if so, the requirement to look out for estimated income could be problematic both for independent film makers and large production companies. It is almost impossible to predict the success of a film in advance. The new obligation would run counter to the process of tax buying accounting treatment and could result in companies paying tax or receiving less by way of tax credit on income that never materialises or well ahead of receiving that income. It also questions its application to films, such as television programmes, that do not attract the tax credit. That illustrates the concern across the industry since that organisation represents a broad-ranging coalition of film industry interests. In contrast, the Economic Secretary seemed to imply that those issues were somehow dreamed up by an incorrect brief from KPMG. I wanted to assure the Committee that they are more widely felt.
I reassure the Economic Secretary that it is not the intention of any of my amendments to leave the Government scheme open to abuse. I stand entirely by what I said in opening the debate. My amendments have been tabled with a view to exploring important issues regarding the computation of profits for film production companies. At the end of the discussion, I remain to be convinced that the move to the new method of calculating profit and loss is necessary to prevent the abuse of the film tax scheme, but I take on board his comments. I will reflect on them, particularly those about amendment No. 41 and possible abuse relating to deferral.
In the light of that, I will not press any of the amendments, but I hope that the Economic Secretary will reflect with care on whether this punitive new regime is necessary to prevent abuse of the film tax scheme. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 4 agreed to.

Clause 38 ordered to stand part of the Bill.

Clause 39

Conditions of relief: intended theatrical release

Edward Balls: I beg to move amendment No. 27, in clause 39, page 31, line 28 [Vol 1], leave out subsection (3) and insert—
‘(3) Whether this condition is met is determined for each accounting period of the film production company during which film-making activities are carried on in relation to the film, in accordance with the following rules.
(4) If at the end of an accounting period the film is intended for theatrical release, the condition is treated as having been met throughout that period (subject to subsection (5)(b)).
(5) If at the end of an accounting period the film is not intended for theatrical release, the condition—
(a) is treated as having been not met throughout that period, and
(b) cannot be met in any subsequent accounting period.
This does not affect any entitlement of the company to relief in an earlier accounting period for which the condition was met.'.

John Butterfill: With this it will be convenient to discuss the following amendments: No. 43, in clause 39, page 31, line 28 [Vol I], leave out subsection (3) and insert—
‘(3) Whether this condition is met may be determined at any time after film making activities begin, so long as the film is intended for theatrical release prior to delivery of the completed film'.
No. 44, in clause 41, page 32, line 4 [Vol I], at end insert
‘and expenditure incurred by a person which is reimbursed by a film production company shall be deemed to be expenditure by the film production company for the purposes of this section where it would have fallen within this section had it been incurred directly by the film production company'.
I call Dawn Primarolo—I am sorry: Ed Balls.

Edward Balls: It is a great honour to serve under your chairmanship, Sir John, and a great compliment to be mistaken for the Paymaster General.

John Butterfill: The similarity is not that great, I know.

Edward Balls: It is a first, but I hope not a last.
It might help the Committee if I set out a little of the thinking behind the clause. It sets out the first condition that a film must meet to be eligible for the new tax relief: subsection (1) makes it clear that it must be intended for theatrical release. That is the same requirement that a film had to meet to qualify for the old relief. Both the old and new reliefs are intended to provide support to films that are made to be shown at the cinema, and exclude other films, which we discussed in our debates on clause 31, such as those made for television. The television industry is healthy and productive and was excluded from the old film tax reliefs in 2002, so this is not a new rule.
Subsection (2) gives more detail on this requirement. Theatrical release means exhibition to the general public at a commercial cinema—again the common-sense, generally understood definition—and a film is considered to be intended for theatrical release only if it is planned that a significant proportion of its income should come from cinema exhibition. This condition was originally imposed because the old reliefs were being abused, and claims were being made for soap operas, news programmes and even for doubtful productions that were clearly not intended to be viewed anywhere, by anyone.
We acted to narrow the scope of the relief to genuine cinema productions, which is what was always intended, and that intention remains. The question is: when should the definition of the film be judged? Under the old system of reliefs, that was done when the film was finished, which was when the old reliefs were claimed. As we discussed earlier, we mean the new reliefs to be claimable from the start to assist film makers with cash flow. That approach is based on a modern understanding of best accounting practice and the way in which TV and film makers work.
As a consequence of the decision to change the model for film tax relief—enhanced tax relief—the film maker now needs to take a view at the outset. But what if something changes? With the original drafting, we would have preserved the original judgment, which was made at an early stage, even when the situation soon changed. However, since the Bill was published, we have held discussions with the industry, and we accept that preserving the original judgment could have unintended consequences. We were particularly concerned that that might lead to film makers taking overly optimistic views in the early stages, so that makers of many productions that are inevitably destined for television or other media would claim film tax relief in the early stages of production. Our amendment will allow greater flexibility when the position changes. It will allow a film that was originally intended for the cinema to drop out of the film tax relief without losing any relief that it has earned to date. I invite the Committee to accept the amendment. 
I turn to amendment No. 43. It will not surprise members of the Committee to learn that I think that the Opposition amendment, which I accept seeks to address the same issue, lacks clarity. The amendment would allow a theatrical release to be determined at any time, which means that it could well change back and forth several times, which means that the tax position could also change, possibly leading to payments, repayments and even re-repayments. The whole position could become confusing and lack clarity. Rather than our accepting the Opposition’s amendment, therefore, I hope that the Committee will reflect on my comments and instead support ours.
Amendment No. 44 seeks to make it explicit that expenditure incurred by a third party that is reimbursed by a film production company—[Interruption.] I feel as though I am caught in the crossfire in an exchange of semaphore messages. I hesitate to turn to the explanatory notes for guidance.

Mark Francois: I apologise to the Economic Secretary. There was some confusion on my part. We thought, looking at the seating arrangements, that the hon. Member for Wolverhampton, South-West (Rob Marris) had been made a Parliamentary Private Secretary. That was a cause for surprise and delight on our Benches, but we have now clarified that that is not the case.

Edward Balls: I am grateful to the hon. Gentleman for clarifying the situation. Even though my hon. Friend the Member for Wolverhampton, South-West is not a PPS, I find his presence behind me reassuring. I am sure that the fact that he will continue to hold the Government properly to account from the Back Benches on the detailed issues is reassuring not just to me but to the taxpayer at large.
Amendment No. 44 seeks to make it explicit that the expenditure incurred by a third party, which is reimbursed by a film production company, should be treated as if it had been incurred by the film production company for the purpose of determining whether the film production company meets the 25 per cent. minimum UK expenditure test. It is common in the film industry for legitimate production costs to be recharged to a third party rather than charged directly to the film maker. That is almost universal in the United States, where the Screen Actors Guild—the Hollywood actors’ trade union—has rules to limit the number of companies to which an actor can charge fees for his or her services. That is likely to be the film production company’s parent company, rather than the film production company itself. I imagine that that is the sort of situation that the amendment seeks to address.
It is accepted accounting practice for costs that are recharged in that way to be treated as though they were incurred directly by the company, and there is nothing in the legislation to indicate that that practice will not continue for the purposes of the new film tax relief. Where costs are recharged to a film production company through a third party, they can be treated as qualifying production expenditure of the film production company as if they were incurred directly by the film production company, provided that they are recharged on a commercial basis and are not designed to inflate the amount of film tax relief that can be claimed. That has already been made clear by Her Majesty’s Revenue and Customs in guidance, which I fear might not yet have been read by members of the Committee, with the possible exception of my hon. Friend the Member for Wolverhampton, South-West. It has been published since 11 April on the website—www.hmrc.gov.uk\films\faqs\htm—which says:
“Q: Can costs charged through third parties be included in production costs? A: The recharging of costs to a subsidiary by its parent company is standard practice in the film industry and elsewhere. Where such costs relate to qualifying production expenditure, they can be included for the purposes of film tax relief, provided they are recharged on a commercial basis and are not designed to inflate the amount of film tax relief that can be claimed.”
Obviously, such costs will be taken into account when determining whether the clause 41 expenditure test is met. Given that that guidance is already on the website, the amendment raises a moot point, so I suggest that it be withdrawn.

Theresa Villiers: I very much agree with the policy objective of the Government to ensure that television production is not subsidised by the film tax break. That has led in the past to problems with the tax break being used in an inappropriate way, and I would not seek to reverse it. What concerns me, which is why I tabled the amendment, is the problem adverted to by the Economic Secretary in relation to the point at which the decision that a film is to be made for theatrical release is made. The original text of the Bill would have provided that that had to happen at a preliminary stage, as soon as film-making activities began. Clause 33 states that those film activities include development and so, to use the example given by the Economic Secretary on Tuesday, the writing of a book that is to become a blockbuster trilogy of films 40 years later could conceivably be considered to be development.
It would make no sense whatsoever to determine the tax status of a film at the start of the development stage. I welcome the Government’s amendment and I am happy not to press mine because theirs does an adequate job in meeting the problem outlined by me and the Economic Secretary.
On amendment No. 44, I welcome the clear indication given by the Economic Secretary that costs incurred by a third party and recharged to the production company will count as expenditure under clause 41. There is therefore no need for me to press the amendment.

Julia Goldsworthy: There is no need to dwell any further on the amendments tabled by the hon. Member for Chipping Barnet, since she has made it clear that she will not press them. We will not call for them to be pressed either.
I also welcome the Government amendment to clause 39(3). It seems that the subsection as it stood would have created a series of perverse incentives and would have been an incentive for people to misrepresent the intentions of their film-making activities.
I will not keep the Committee too long, but I wanted to draw its attention to the word “significant” in subsection (2)(b), because the subsection states that
“a film is not regarded as intended for theatrical release unless it is intended that a significant proportion of the earnings from the film should be obtained by such exhibition.”
I would appreciate some clarification of how that can be demonstrated. It is obviously not always easy to predict the proportion of earnings that a film will generate from theatrical release compared with DVD or video release. If the Minister could clarify what the word “significant” represents, I would be grateful.

Edward Balls: It is a pleasure to be able to give an answer to the hon. Lady. Films do not just happen by accident but are carefully planned, so we would hope that the intended outlet for the film would be clear from an early stage. That will be reflected by who commissions the film, its intended outlet, how it is made and the distribution agents that are put in place.
The Revenue will look carefully at the plans in each individual case, to see not only the intended degree of revenue but how the film will be introduced to the distributional channels. Different indicators can be brought together to allow the judgment to be made, so to set a number on the word “significant” and to make that the only test would be too narrow a view. It is much better to say, as the legislation does, that the proportion needs to be significant and that it needs to be clearly and demonstrably the case that the film is intended for the cinema. That should be a judgment made in the round based on a number of factors.

Amendment agreed to.

Clause 39, as amended, ordered to stand part of the Bill.

Clause 40

Conditions of relief: British Film

Question proposed, That the clause stand part of the Bill.

Theresa Villiers: Clause 40 focuses on the requirement that a film be culturally British. I can see the merits of focusing film tax relief on culturally British films and of the indirect benefits of the promotion of UK plc around the world by the film industry. Those benefits would be more direct and stronger with films of particular cultural Britishness.
I shall flag up one concern, however: there could be room for debate on what is sufficiently British. For example, would “The Chronicles of Narnia” have been sufficiently British? Will the “Red Dwarf” movie—currently in production—be sufficiently British? There is a lot of involvement in that film by the British film production industry. Would that pass the test?
The points-scoring system, whereby it is possible to take diverse factors into account such as a film’s cultural content and setting, the nationality of its characters and its use of UK cultural hubs, seems to be broadly workable. I welcome the fact that the test makes provision for a UK cultural hub for visual and special effects because those are some of the strongest aspects of the UK film industry; our visual and special effects industry is one of the most successful in the world. Encouraging film makers to use those facilities is desirable.
My principal concern is the same as that which I raised during deliberation on another part of the Bill: is the EU state aid regime the principal concern motivating clause 40? Or did the Government form the view that we need a test of Britishness?

Edward Balls: As the clause makes clear, and as I think that we discussed on Tuesday, in order to be eligible for film tax relief, a film is required to be British and to be certified as such by the Secretary of State for Culture, Media and Sport under schedule 1 to the Films Act 1985. That was the previous requirement for film tax reliefs. However, my right hon. Friend has developed and introduced a new film tax regime designed to be simpler to operate and more geared towards a film’s British cultural status.
I had the pleasure to serve on the Committee that debated the details of that cultural test. Certainly, the conditions set out are extensive, but it will not surprise the Committee that that is the responsibility of my right hon. Friend, not the Treasury. Obviously, it would be inappropriate for a Treasury Minister to comment on any matters outside the direct purview of the Treasury, so that is really a matter for my right hon. Friend’s Department.
On European Commission state aids, we discussed the procedure for state aids clearance during consideration of the clauses on tax reform. The state aids rules require that support be directed towards films that are cultural products, which is why the Department for Culture, Media and Sport has been in dialogue with the Commission over compatibility with the state aids rules and its responsibilities. That Department, like the Treasury, has notified the Commission of the test, but that is for it to pursue.
I can reassure the hon. Member for Chipping Barnet that this is not being done because of a requirement from the Commission, but because we want a test of Britishness that will allow us to say with hand on heart that we are supporting the production of British films.

Question put and agreed to.

Clause 40 ordered to stand part of the Bill.

Clauses 41 and 42 ordered to stand part of the Bill.

Schedule 5

Film tax relief: further provisions

Theresa Villiers: I beg to move amendment No. 54, in page 170, line 5 [Vol I], after ‘pay' insert
‘within 90 days of the claim being made, subject to sub-paragraphs (3) and (4) below,'.
Amendment No. 54 would insert an obligation on the Treasury to pay the film tax credit within 90 days of the claim, for the following reason. Considerable concern has been expressed about the timing of the Revenue’s payment of tax credits. As we are all aware, payments of tax credits have been subject to severe administrative problems.

Dawn Primarolo: If the hon. Lady considers the operation of the research and development tax credit, on which the film tax credit is modelled, she will find no such delay or problems. Perhaps she would like to make a direct comparison instead of hitting away into areas that are not connected to the issue.

Theresa Villiers: I appreciate the right hon. Lady’s comments. The reason why I referred to tax credits is that many of my constituents have extreme difficulties with the working families tax credit system, which has had problems. I acknowledge that the example that we are talking about is different from the tax credit systems whose problems have been most serious, but it is reasonable to refer to problems in other areas with a view to ensuring that such problems do not recur.

Dawn Primarolo: If we are to have a serious debate, will the hon. Lady draw the parallels between a payable tax credit to families, which is based on integration of the tax and benefit systems, and payable tax credits for research and development in the tax system, on which the film tax credit is modelled? Their names are the only similarity.

Theresa Villiers: I acknowledge that the two systems are different. I am saying only that we do not want the problems that have arisen in one area to arise in another.
Uncertainty about the time scale for the payment of film tax credits will drive up the cost of funding a film because of the increased risk involved in delays. I hope that the Government will consider accepting amendment No. 54 to inject a welcome degree of certainty into the measures. It would also be useful if the Economic Secretary indicated how long the Government expect that it will take, on average, to pay out a tax credit. Are they doing any research on the matter?

Rob Marris: The hon. Lady would like the payments to be made within 90 days of a claim. Would that not be unworkable, as the time would run from when a claim was made and not from when a valid claim was made, fully supported by appropriate documentation and evidence?

Theresa Villiers: That is the point of the amendment—to ensure a clear timetable for getting the claim sorted out and paid.

Philip Dunne: To help my hon. Friend, I shall illustrate the point. For an example of a Government agency that seems incapable of providing payments for validated claims, we need look only to the Rural Payments Agency, which was debated today on the Floor of the House. It illustrates the extent of the problem and the reason why so many sectors of the economy are concerned about exceptionally complex Government innovation introducing a new relief, subsidy or tax credit that the relevant Government agency will be incapable of delivering according to its own schedule and statutory procedures. That is why the amendment is seeking to direct confidence back into the system. That is its purpose.

Theresa Villiers: My hon. Friend makes his point well.

Rob Marris: Will the hon. Lady give way?

Theresa Villiers: No, I shall conclude my remarks.
Julia Goldsworthyrose—

Theresa Villiers: No, I will now conclude. Government amendment No. 24 seems like a straightforward tidying up exercise, to which the Opposition has no objection in principle.

Julia Goldsworthy: I will make a couple of short remarks. The hon. Member for Wolverhampton, South-West makes a valid point. However, it would have been appropriate to have an amendment to paragraph 9(1)(b) to ensure that the claim was valid. As for the amendment introduced by the hon. Member for Chipping Barnet, if the Minister is confident that the payment will be delivered within an appropriate time scale, clearly she will have no problem in accepting the amendment.

Rob Marris: The hon. Member for Falmouth and Camborne (Julia Goldsworthy) has made a good point. However, I think that the hon. Member for Chipping Barnet misunderstood my intervention. I will therefore repeat it, perhaps more fully. The effect of the amendment, were it to be accepted, would be that if a film production company put in a claim showing that it was entitled to a tax credit, it would be entitled to have it paid out within 90 days even if it was not actually entitled to the tax credit because it had not put in the right documentation. The company could argue, statutorily, that it had to be paid because the 90 days was up as per the Act of Parliament. With respect to the hon. Lady, it would be a complete nonsense if a company were to be entitled to receive a payment when it had not produced proper evidence. All members of the Committee would recognise that companies should provide proper evidence to validate claims to receive tax credits.

Edward Balls: It is obviously important that we implement the film tax credit as efficiently and professionally as we can. As my right hon. Friend the Paymaster General said, there is much that we can learn from the tried and tested model of the research and development tax credit, which has been successful in its impact and administration.
It is important to say that we are talking about a tax credit. Therefore, it depends on the company’s tax position and that is why the claim needs to be in the company’s return and why repayment will depend on the broader complexity of those tax arrangements.

John Hemming: I am having difficulty in working out the circumstances under which a payment would be made. As far as I can see, a payment would be made only when a film was expected to make a loss over its whole lifetime, and on that basis one would not even make the film. So I find the provision a bit odd.

Edward Balls: The hon. Gentleman may have missed some of the detail of earlier debates—in particular, that this is a payable tax credit. It can either be taken as a credit against tax take, or as a direct cash payment in the event that the film makes a loss. It operates in a similar way to the research and development tax credit, which is why it is called a payable tax credit.

John Hemming: The difference between the film tax credit and the research and development tax credit is that in this instance we are calculating the liability to corporation tax on the basis of the averaged-out income against the expenditure, whereas with research and development the same assumption is not being made.

Edward Balls: It is also the case that we are paying out this tax credit on the basis of making a British film, rather than for research and development. They are clearly not analogous; they are different. One is about making a film, which has a particular tax treatment set out in schedule 4; the other is about research and development. So I would not say that they are identical, but the general model has similarities, and one similarity is the fact that the film tax credit is payable. If over the lifetime of the film the company is making a loss year by year, it can claim the enhanced relief as a credit.
I make the point to the hon. Member for Chipping Barnet that it is helpful and constructive to have amendments that are designed to ensure that the tax system is operated in an effective and efficient way, but if one is going to table such amendments, and do so in a pointed and sharp political way, it is important to get them right. The problem with the amendment is not the wider political shenanigans surrounding its introduction but the fact that it is badly drafted and flawed and does not achieve what the hon. Lady intends.
I got the impression from the hon. Lady’s speech that she expects the clock to start ticking on the 90-day entitlement when the claim is made; from her speech, one would have assumed that the claimant would be forgiven for thinking that the clock started ticking at that point. But in the amendment the clock starts ticking not when the claim is made but when the entitlement is established. I should have thought from my experience of HMRC policy that 90 days is a generous or rather too long a period if the clock starts from the point when the entitlement is established, and the amendment appears to be drafted on that basis. We would hope to get payments out much quicker than 90 days once the entitlement has been established.
The entitlement needs to be established promptly, without impediment, but the time that that process takes depends on the broader issue of the tax return and its complexity, and the time that it would take to establish that it is not some sort of complex trade that is being abused for tax-avoidance purposes. HMRC will take the time that it needs to establish that it is not tax avoidance and its officials will want to do that as expeditiously as possible. That is part of their job; they will also ensure that they do it properly and they will take time to establish the entitlement. From the point that the entitlement is established, 90 days is too long a period, but that is what the amendment refers to. The proposal is flawed; it misunderstands what it is trying to achieve and therefore lets the Revenue off the hook rather than tying it down.
My advice to the hon. Lady is that if she wants to criticise the Government on the matter of administration it is important to get the facts right before tabling an amendment. Being more generous, I would say that one of the great advantages of this debate is that we can discuss these matters in a friendly, co-operative way, knowing that we agree on the general objective, which is to ensure that British films are subsidised in Britain. If only we had the same unanimity on our goals to reduce child poverty through the tax credit system; maybe in that respect there might be a bit more consensus than there has been so far.

Theresa Villiers: I shall start by reassuring the hon. Member for Wolverhampton, South-West that the amendment does not seek to entitle a film production company to the film tax credit automatically, regardless of whether a valid claim is made, because it is inserted in the last line of paragraph 9. The preceding two paragraphs make it clear that a valid claim must be established before the last line kicks in.
I welcome the Economic Secretary’s indication that the Revenue is convinced that 90 days would indeed be too long, and that it would anticipate paying out on the film tax credit much more quickly than that. My point is sufficiently made with that indication from the hon. Gentleman, which I welcome, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Edward Balls: I beg to move amendment No. 24, in page 173, line 33 [Vol I], leave out ‘that Chapter' and insert
‘Chapter 3 of Part 3 of the Finance Act 2006'.
This small amendment addresses a slight drafting defect in the Bill, which we want to set straight. Part 2 of schedule 5, paragraphs 14 to 25, makes changes to schedule 1 of the Films Act 1985. Schedule 1 sets out the rules for certification of films as British. The new tax relief requires a number of changes to those rules and some of those changes require references back to chapter 3 of part 3 of the Finance (No. 2) Bill or, as I trust it will eventually become, the Finance Act 2006. The amendment simply inserts a full reference to chapter 3 of the forthcoming Act, instead of the phrase “that chapter”, which is not otherwise defined.

Amendment agreed to.

Question proposed, That this schedule, as amended, be the fifth schedule to the Bill.

John Hemming: This comes back to the previous point. I am trying to assess how this relief gets paid. I accept the point about the research and development tax credit which is funded right at the start of the project, but there are two issues here. First, there is a massive nuisance in that to qualify for this relief one has to take the tail end income and count that at the start of the project. One does not have the cash, but one must account for a profit that will be made on income that will be received in perhaps a couple of years’ time and one must account for it as soon as one starts spending money on the project. That is a real burden.
The question is, what is the benefit? The benefit is the availability of a tax credit where there is a surrenderable loss. With various complications, which are not as complicated as those surrounding capital gains tax and so on but are still quite complicated, one will possibly get between 16 and 20 per cent. of the surrenderable loss at the best of times. The real question is how in the real world we will have a situation where someone will be paid a tax credit. If the calculation is on the basis of a loss, it must be a loss over the whole of the project on the basis of the initial calculation as to the estimated income, unless there is something else within the entity that is losing money. That is the issue that interests me.

Jeremy Wright: I simply wanted to ask a question in the absence of the hon. Member for Dundee, East (Stewart Hosie). I am sure that he would have asked it if he were here. It relates to paragraph 25, particularly subparagraphs (5) and (6), which deal with the agencies that are entitled to conduct a prosecution for the wrongful disclosure of information related to Revenue and Customs. It is clear which agencies prosecute in England and Wales and in Northern Ireland, but which agency would do so in Scotland?

Edward Balls: I will reflect on that and try to find an answer in due course. First I shall make some remarks about the schedule and the loss rules which I hope will help to clarify matters. The schedule is in four parts. The first sets out how the relief is calculated. The second part amends schedule 1 to the Films Act 1985, which deals with the certification of films in Britain. The third part provides claims machinery for the relief. The fourth part deals with claims for relief made before a film is completed. Finally, to answer the hon. Member for Rugby and Kenilworth (Jeremy Wright), in Scotland prosecutions under the schedule would be taken forward by the procurator fiscal.

Jeremy Wright: I am impressed by the speed at which the Minister can get these answers. But why is it not in the schedule?

Edward Balls: That is an interesting question.

Rob Marris: rose—

John Butterfill: Order. The hon. Gentleman cannot intervene while the Minister is still attempting to answer the question. When the Minister has finished answering it, the hon. Gentleman may be at liberty to intervene again.

Edward Balls: I apologise, Sir John. It is helpful to be set straight on that point of procedure. I was about to say that if that issue had occurred earlier to the hon. Member for Rugby and Kenilworth, I presume that he would have tabled an amendment to clarify this schedule to the Bill. Obviously, that thought did not occur to him until a much later stage.

Mark Francois: Or, indeed, to the Minister.

Rob Marris: Will my hon. Friend the Economic Secretary give way on that point?

Edward Balls: No. I am told that, in Scotland, the Procurator Fiscal Service is not only an authority that may deal with these matters but the only one that may do so. Therefore, it might be thought to be overburdening the schedule to state the obvious within it. However, we will reflect on the drafting advice of the hon. Member for Rugby and Kenilworth for future occasions.

Rob Marris: My hon. Friend has partially answered this, but just to clarify: I did not put in an amendment because the words on line 42 are, “England and Wales only”. Paragraph 25(5) narrows down the possibilities as to who might bring a prosecution and so on; no such narrowing down was required in Scotland for the very reason that my hon. Friend has given.

Edward Balls: I am grateful to my hon. Friend and, referring back to earlier comments in response to the intervention by the hon. Member for Rayleigh (Mr. Francois), the Committee should be reassured to know that my hon. Friend the Member for Wolverhampton, South-West is scrutinising our proceedings with such care. In an analogy with the Bank of England, where a decision not to raise interest rates is as important as the decision to do so, knowing that my hon. Friend considered whether an amendment was necessary and decided not to table it provides me with a similar degree of reassurance as if he had. Therefore we can move on, comfortable in the knowledge that he is keeping a close eye on proceedings, from whichever Bench.
I turn to the other matters of substance in hand.

Mark Francois: Returning for a moment to film.

Edward Balls: Returning for a moment to film, I turn to part 1 to set out some more detail which I hope will help all hon. Members, particularly the hon. Member for Birmingham, Yardley (John Hemming). He is asking the same series of questions and I fear that I am giving the same answer, so if I put the answer in a broader context that may help the Committee to understand both my answers and his interventions.
Part 1 implements our announcement in the pre-Budget report that a British film starting principal photography on or after 1 April 2006 and meeting the conditions that we set out, is entitled to film tax relief, which is given as an additional deduction in computing its profits—the amount of which deduction, as debated earlier, is defined in paragraph 4—and possibly as a payable tax credit as set out in paragraphs 6 and 7. The amount of the deduction is based on the actual UK spending subject to a cap of 80 per cent. of the production company’s spending. That cap, as we have discussed, is needed to meet European Commission state aid rules requiring that it must be possible to spend at least 20 per cent. of the film’s budget elsewhere in the EU without loss of relief. As also discussed, we reduced that requirement from 40 per cent. at an early stage.
Paragraph 4(3) would allow the Treasury to amend the 80 per cent. limit so that any future changes in state aid rules could be accommodated, but at this stage we do not envisage complications in state aid clearance. The additional deduction is defined in paragraph 4 as the result of that threshold multiplied by the appropriate rate—100 per cent. for a limited-budget film and 80 per cent. for a large-budget film. That additional deduction will alter the overall profit or loss previously calculated according to schedule 4, which we debated earlier. If the results of the calculation place a company in loss, paragraph 6 will allow some of the loss to be surrendered for a payable tax credit. The amount that can be surrendered is capped at the same threshold amount as I mentioned a few moments ago—the actual UK spend up to 80 per cent. of the total spend. It is not limited to the amount of the additional deduction. That is the position in the first period of account, which in the case of most films will be the only period.
It is unusual for a film to take several years to make, although it does happen. In later periods, if there are any, the rules are slightly more complicated and examine cumulative spending, but the principle is the same. In calculating the additional deduction for and the amount of loss that can be surrendered in such later periods, paragraphs 4(2) and 6(4) take account of the amounts in previous periods so that the Commission’s 20 per cent. rule is met over the film’s overall production period. That measure is necessary because the new film tax relief may be claimed by companies period-by-period as a film is made, whereas the previous reliefs under section 42 of the Finance (No. 2) Act 1992 and section 48 of the Finance (No. 2) Act 1997 could be claimed only on completion of the film, which was much simpler because all the facts were known and final positions could be determined.
Once the amount of loss to be surrendered has been determined—a company need not surrender the maximum amount but can instead retain losses to set against future income from the film, which might be more advantageous—it is multiplied by the appropriate credit rate as set out in paragraph 8 to determine the actual payable credit. Again the credit is higher for a limited-budget film than for a large-budget film. Were the losses instead to be retained and set against film incomes, taxed at 30 per cent., the losses would of course be worth slightly more. Whether to do that is of course a company’s choice. Once the amount of payable credit has been determined and a claim made, paragraph 9 requires Her Majesty’s Revenue and Customs to pay it to the company, although there are protective provisions in that paragraph to deal with circumstances where the company owes money to HMRC or its tax return is being inquired into.
Paragraph 10 makes it clear that the payment of tax credit is not itself taxable. Paragraphs 12 and 13 are aimed at preventing the inflation of film tax relief. Paragraph 12 addresses circumstances where a payment is deferred. While we accept that deferred payments are a legitimate practice in the film industry, we do not accept that the film tax relief should be based on payments that have not yet been made. When they are made they can be included. Paragraph 13 is a more general measure aimed at attempts to inflate the amount of film tax relief. It is along the same lines as other rules, such as those on the R and D tax credit in paragraph 21 of schedule 20 to the Finance Act 2000, and targets arrangements the sole or main purpose of which is to obtain or inflate the amount of film tax credit. That does not include ordinary transactions that would in any case be undertaken in making a film, such as establishing a film production company in the first place. We do not want to get in the way of such transactions, but as we have said, we will not accept amendments that abuse the new system.
I hope that that detail makes things clearer to the hon. Member for Birmingham, Yardley. As I said, a film is typically made by a film production company under a contract. If that contract results in the film production company making a loss, the tax credit may be payable, but the film may be profitable to whoever commissioned it.

Question put and agreed to.

Schedule 5, as amended, agreed to.

Clauses 43 and 44 ordered to stand part of the Bill.

Clause 45

Films: terminal losses

Theresa Villiers: I beg to move amendment No. 36, in page 33, line 21 [Vol I], leave out ‘qualifying'.

John Butterfill: With this it will be convenient to discuss the following amendments: No. 37, in page 33, line 26 [Vol I], leave out ‘qualifying'.
No. 38, in page 33, line 32 [Vol I], leave out first ‘qualifying'.
No. 39, in page 34, line 6 [Vol I], leave out from ‘Schedule 4' to end of line 8.

Theresa Villiers: The clause concerns terminal losses. When a film production company making a film that qualifies for tax relief ceases trading, the clause will allow its losses to be transferred to another, similar trade of the same company or within the same group. At present, clause 45 relief for terminal losses on the cessation of activity on a film is limited to films qualifying for the enhanced tax credit. Amendments Nos. 36 to 39 would remove that restriction. They are probing amendments so that we can discover the Government’s motivation for providing relief only for certain films. Will the Minister outline his reasons for the proposed restrictions? The amendments would provide that terminal loss relief could be claimed on all films, not only those that qualify for enhanced tax credit. I can see no good reason for the Bill to restrict terminal loss in such a way.
My second point relates to the losses generated by enhanced deductions when they can be surrendered intra-group when the film is completed or has been abandoned. The possibility of surrendering them intra-group is welcome. It is an important part of the clause. My worry relates to subsection (1)(a), which requires that a company
“ceases to carry on a trade in relation to a qualifying film”
before the losses can be passed on. I should welcome the Economic Secretary’s view on the situation in which receipts continue to come in over months or years afterwards. As we have discussed, some of the income that falls within schedule 4 may come in at much later stages, unexpectedly. It would be useful to have a point at which the terminal loss regime can kick in, despite the outside possibility that revenue may be received for the film in an unexpected way in the future. Will the possibility of delayed receipts preclude the possibility of the loss being passed on? I welcome the Minister’s clarification.

Edward Balls: I shall explain the purpose of clause 45, and then discuss the amendments. The clause allows the unrealised losses that will be available to a qualifying film in one trade to be handed to another qualifying film, when it is no longer possible to utilise them in relation to the original film. It will encourage films to be made and rights held together in a company or within a group. If a film production company chooses not to surrender losses for film tax credits, it will make use of the film tax relief by setting the losses created by the additional deductions against income from other films that it produces, reducing the tax that it has to pay on real profits.
If, and when, the trade ceases because the film is sold or is no longer capable of exploitation, it is possible that there will be unrealised film tax relief. If nothing were to be done, those reliefs would be stranded or lost for ever. One purpose of this chapter is to ensure that we not only support individual British films, but encourage individual British film makers to make slates of films: to implement a strategy for a series of films over time—even avante-garde films—and to use their losses appropriately.
One of the aims of the relief is to encourage films to be held as a slate, where risk and reward is pooled by producing and holding films at different stages, so that films that make losses can be balanced against those that are profitable. Under clause 45, when a qualifying film produced by a film production company is sold or ceases to be exploitable—that is, when the trade cases—and there are losses that could have been carried forward, they can be passed on. But it is important that the losses that would otherwise be stranded are passed on only in a way that recognises the purpose of the chapter, which is to support British films and thus meet our sustainability objective.
The terminal losses can be passed to another trade within the company, or to another company in the group only if that company is making another qualifying British film. It will not be enough to buy in rights to provide income against which to set the losses or to make any old film that will make a profit. In their original setting, the losses could only be set against the income of a British film so, in the trade that acquires them, the losses are similarly restricted in their use.
Although the drafting of amendments Nos. 36 to 38 is not quite right in that it would remove a reference to schedule 4 at the end of clause 45(6), it is clear that the intent of those amendments is to remove the requirement that, for terminal loss relief to apply, a film must be qualifying film. It should be clear to the Committee, on the basis of my remarks so far, that that is not acceptable to us. The terminal loss relief is part of a balanced package designed to encourage the British cinema and film industry. That is why it is restricted to films that qualify for the new relief in schedule 5.
On that basis, I urge the Committee to reject the amendment.

Theresa Villiers: I am grateful for the Economic Secretary’s comments. I am disappointed that he was not sympathetic to the amendments. However, as I do not feel that it would be productive to press it to a vote, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 45 ordered to stand part of the Bill.

Clause 46

Films: withdrawal of existing reliefs (corporation tax)

Theresa Villiers: I shall not move amendments Nos. 48 to 52, because they are consequential to an amendment that has already been discussed and withdrawn, so it would not be productive for the Committee to consider these matters again.

Clauses 46 to 53 ordered to stand part of the Bill.

Clause 54

Transactions with substantial donors

Paul Goodman: I beg to move amendment No. 77, in page 38, line 34 [Vol I], at end insert
‘at a rate that is less than an arm's length rate'.

John Butterfill: With this it will be convenient to discuss the following: Amendment No. 78, in page 38, line 35 [Vol I], at end insert
‘at a rate that is less than an arm's length rate'.
Amendment No. 79, in page 38, line 36 [Vol I], at end insert
‘at a rate that is less than an arm's length rate'.
Amendment No. 80, in page 38, line 37 [Vol I], at end insert
‘at a rate that is less than an arm's length rate'.
Amendment No. 81, in page 38, line 39 [Vol I], at end insert
‘at a value that differs from market value so that the charity is disadvantaged by the transaction'.
Amendment No. 82, in page 39, line 3 [Vol I], after ‘investment', insert
‘other than a Qualifying Investment for the purposes of Schedule 20 of ICTA 1988'.
Amendment No. 83, in page 39 [Vol I], leave out lines 15 to 17.
Amendment No. 84, in page 39 [Vol I], leave out lines 18 to 23.
Amendment No. 85, in page 39, line 26 [Vol I], after ‘remuneration', insert
‘unless it is paid either under a contract of employment at a rate not exceeding an arm's length rate or'.
Amendment No. 86, in page 39 [Vol I], leave out lines 37 and 38.
Amendment No. 87, in page 40, line 9 [Vol I], leave out
‘on a recognised stock exchange'
and insert
‘or admitted to trading on any market which from time to time appears on the most-recently updated list of regulated markets as published by the European Commission under Acticle 16 of Directive 93/22/EEC (OJL 141, 11.6.1993) or Article 47 of Directive 2004/39/EC (OJL 145, 30.4.2004) together with securities admitted to trading on the Alternative Investment Market of the London Stock Exchange PLC; or is a Qualifying Investment for the purposes of Schedule 20 of ICTA 1988'.
Government amendment No. 62.
Amendment No. 88, in page 40, line 23 [Vol I], leave out ‘which is wholly' and insert
‘of which 50 per cent. or more of the shares is'.
Government amendment No. 63.
Amendment No. 89, in page 41 [Vol I], leave out lines 1 to 6 and insert—
‘(4) Subsection 3 of section 506A shall not apply to any transaction to which subsection 4 applies.'.
Amendment No. 90, in page 41, line 28 [Vol I], at end insert—
‘(10) Where a person who considers that subsection 3 or 4 of Section 506A above may apply to any transaction or proposed transaction, supplies to the inspector to whom he makes his return of income written particulars of the transaction or proposed transaction—
(a) the inspector shall, within 30 days from his receipt of the particulars, notify that person whether or not he is satisfied that, in the circumstances as described in the particulars, the transaction would not be chargeable to tax on that person under this section; and
(b) if the inspector notifies that person that he is so satisfied, the transaction shall not be chargeable on that person under this section.
(11) If the particulars given under this section with respect to the transaction are not such as to make full and accurate disclosure of all facts and considerations relating thereto which are material to be known to the inspector, any notification given by the inspector under subsection (10) above shall be void.'.
Amendment No. 91, in page 41, line 31 [Vol I], leave out
‘by reference to gifts made at any time'
and insert
‘only by reference to gifts made on or after that date'.

Paul Goodman: It is a pleasure, Sir John, to see you in the Chair. If I make the mistake of moving an amendment when I am debating it, I know that you will pull me up at once and put me right. I think that I am moving amendment No. 77 and speaking to amendments Nos. 78 to 87 and amendments Nos. 88 to 91. I do not know if the Economic Secretary will be dealing with this chapter—I think that he will not, from the way that he is moving with his files—so I might not have the opportunity to congratulate him on his appointment, which I have not yet had the chance to do even though it has been recorded that I have done so.

John Butterfill: Order. May I just make it clear, for the benefit of all Committee members, that in relation to each of the amendments that I have introduced, this will be the only opportunity for them to be debated, although it will not be the only opportunity for them to be voted on?

Paul Goodman: I am grateful for your guidance, Sir John. Because no Minister has had the opportunity to speak to clause 54, we are in the correct but slightly difficult situation of having to explain a little about the clause in order to make sense of the amendments. Without pre-empting the clause stand part debate, I want to outline the context, which is that the measures set out in clauses 54 to 58 aim to prevent the exploitation of charity tax reliefs. No doubt, in due course, the Paymaster General will make the case for them. To make part of her case for her, the measures have been welcomed by the Institute of Fundraising, the National Council for Voluntary Organisations and the charity finance directors group.
We understand the Government’s concern about such exploitation, and support in principle efforts to prevent it from taking place, as do other organisations that have commented on the clauses, such as the Charities Tax Reform Group, The Law Commission and the Chartered Institute of Taxation. However, and in such matters there is nearly always a “however”, those latter organisations are concerned about the clauses both because some innocent transactions might inadvertently be caught by them and because they will add unnecessary complexity to the tax system. In addition, they fear that those two factors could cause a reduction in charitable activity, which I am sure is not the Government’s intention. In short, we might have another example of the law of unintended consequences.
It is worth noting that Ministers do not claim that the clauses are incapable of improvement, given that they have tabled two amendments—Government amendments Nos. 62 and 63—that seek to plug the gaps in the proposed clauses. Government amendment No. 63, in relation to housing associations, is particularly important in that regard. Our amendments are essentially probing amendments. They seek to lessen the risk of innocent transactions being caught by the clauses and to reduce complexity.

Brooks Newmark: I understand that the Charities Tax Reform Group has had discussions with Ministers to express concerns about the very issues that my hon. Friend raises. It would be interesting to know the results of those discussions as they relate to my hon. Friend’s concerns.

Paul Goodman: Indeed. As my hon. Friend appreciates, I was not present at those discussions, nor, I believe, were any of my hon. Friends. I am sure that the Paymaster General will want to comment on them in due course and in a moment I shall raise some of the concerns that were voiced. Our intention is to prevent innocent transactions from being caught by anti-avoidance measures that are quite proper in their intent, and we will listen carefully to what the Paymaster General says before deciding whether to press the amendments to a vote.
Amendments Nos. 77 to 80 aim to clarify that the sale or letting of property to a charity by a substantial donor at market value—that is, as part of a normal business transaction in which there is no special deal or arrangement between the substantial donor and the charity—would not be caught by the clause.
Amendment No. 81, has a similar aim—to clarify that an exchange of property between a charity and a substantial donor at market value will not be caught by the clause.
Amendment No. 82 aims to ensure that otherwise unexceptionable transactions by a charity are not caught by the legislation. One example of an unexceptionable transaction is when a charity buys a property from a substantial donor at full arm’s length value, whether or not the charity intends to use it for charitable purposes.
To illustrate the example, let us suppose that a private landowner owning 5 acres of farmland next to a school donates 1 acre of that land, worth £200,000, to the school for use as a playing field. The next year, he decides to sell the remaining 4 acres on the open market, of which the school buys another acre to build a new science block. If the school bought the same property at the same price from a non-donor, the expenditure would be treated as charitable expenditure. However, it is claimed that under proposed new section 506A(3) of the Income and Corporation Taxes Act 1988, the school would be caught and would have a tax liability of £60,000 in respect of purchase if it was a corporate charity and £80,000 if it was a trust.
Another example of an unexceptionable transaction is when a charity purchases property from a substantial donor as an investment that qualifies under any of the provisions of schedule 20 to the Income and Corporation Taxes Act 1988 except paragraph 5. To illustrate the example, let us suppose that a charity buys a house from a private householder as an investment. Under the same section of the Bill, it would have a tax liability of up to 40 per cent. of the value of the house if the householder was a substantial donor.
A third example is when a charity makes an investment in unquoted shares that qualify under paragraph 9 of our old friend schedule 20 of ICTA 1998. To illustrate, let us suppose that a charity enters into a joint venture agreement with a commercial company. For example, a health care charity might use its consultancy expertise to provide private health care services through such a joint venture. The charity holds 50 per cent. of the shares in the joint venture company and receives regular and substantial payments of gift aid from the company. The 50 per cent. subsidiary therefore becomes a substantial donor and, although the investment is a qualifying investment, tax will be charged on the amount of any share or loan capital invested by the charity in the associated company.
I turn to another example. The National Trust is concerned that the measures are drawn very widely and could catch many innocent transactions in which the trust has a relationship with substantial donors. It says:
“For example, the following situations could trigger a tax change in our circumstances: a donor family, living in a National Trust mansion free of charge or at a below-market rent under a historic agreement entered into at the time the mansion was donated to the Trust, who now make a substantial donation to the Trust”
to fund a restoration project at the mansion, for example. The National Trust believes that it would be caught by the clause.
Another example is when a trust purchasing land from a substantial donor needs to pay more for the land than its market value—for instance, when the trust makes a private offer to secure conservation land as an incentive to the vendor not to sell it on the open market or at auction. Those concerns were raised with me during the past few days, after I had prepared my initial remarks.
Amendment No. 83 seeks to remove subsection (3) from the Bill. The Charities Tax Reform Group argues that the subsection is drawn too widely and that in any case it is unnecessary because subsection (4), which catches all transactions on non-arm’s length rate terms, fulfils the same function. I would be interested to hear the Paymaster General’s response to that.
Amendment No. 84 seeks to remove subsection (4) from the Bill. The Charities Tax Reform Group argues that it can be difficult for a charity to establish what an arm’s length rate might be for the purposes of a transaction, and claims, with some force, that most charities do not have the resources to pay consultants in order to establish a market rate for every transaction. For instance, the market rate for the use of a charity’s name and logo in an advertising campaign varies from charity to charity. There is one main concern about the substantial donor clauses: a substantial donor to a small charity might be a very important donor whereas a substantial donor to a larger charity might not be so important. Perhaps that is illustrated by the point about the logos.
Will the Paymaster General tell the Committee what steps charities will be required to take to determine whether a transaction is at a market rate and what evidence they will have to retain? The Charities Tax Reform Group argues that unless subsection (4) is removed, charities will incur substantial compliance costs. However, if the subsection must be retained, and of course amendment No. 83, which I proposed, presumed that it would be retained—[Interruption.] I was waiting for some alert person—possibly the hon. Member for Wolverhampton, South-West—to get to his feet and ask why the Charities Tax Reform Group proposed to delete one subsection relying on another, and then to remove that other subsection. The Charities Tax Reform Group argues that if it must be retained—I am confident that the Paymaster General will say that it will be—there should be a de minimis amount beneath which Her Majesty’s Revenue and Customs would not dispute the amounts charged by or to a charity. I would be grateful to hear her comments.
Amendment No. 85 seeks to insert on page 39, line 26, after “remuneration”:
“unless it is paid either under a contract of employment at a rate not exceeding an arm’s length rate or”
for services as a trustee. The amendment aims to ensure that employees of a charity can be substantial donors to that charity. As it is, the subsection apparently means that if an employee of a charity who is not a trustee makes substantial donations to that charity, either under gift aid or as a deduction from payroll, that employee’s salary is to be treated as a non-charitable expense.
If the Paymaster General is unwilling to accept the amendment, she might at least make it clear that the subsection should apply only when an employee is paid more than another employee doing a similar job who is not a donor, and that it should be clarified that remuneration to an employee who is not a trustee does not need to be approved by the Charity Commission. I would be grateful for her comments.

Rob Marris: I should now like to see whether we are alert; I had picked up on the point to which the hon. Gentleman referred about subsections (3) and (4). If I read amendment No. 85 correctly and if it were inserted, subsection (5) would read extremely oddly, to say the least. Is the hon. Gentleman aware of that?

Paul Goodman: What the hon. Gentleman thinks may read oddly is not necessarily what I think reads oddly. I should be happy for him to enlarge on that point.

Rob Marris: Although I may be misreading it, under the amendment, subsection (5) would read that
“for the purposes of section 505 as non-charitable expenditure unless it is remuneration unless it is paid either under a contract of employment at a rate not exceeding an arm's length rate or for services as a trustee”.
If I have read that correctly, and I concede that I may have not, it is because the word “unless” is used twice within four words.

Paul Goodman: I think that the hon. Gentleman is using the term “odd” to describe something “inelegant”. I am willing to concede that it may not be elegant drafting, but I am sure that, legally speaking—although I am not a lawyer—it is effective or surely the amendment would not have been accepted for debate.
Perhaps I can move on to amendment No. 86, ready as I always am to be picked up by the hon. Gentleman for stylistic inelegance or, indeed, for any other matter. Amendment No. 86 would leave out lines 37 and 38 on page 39. Subsection (1)(a) of the proposed new section 68B provides an exemption where a transaction is undertaken as part of the donor’s business. As paragraph (b) deals with arm’s length terms, the Charities Tax Reform Group argues that there is no need for paragraph (a) and asks what difference it makes whether the transaction is a business transaction for the donor.
Amendment No. 87 returns us to the country explored in amendment No. 82 and would insert the words
“or is a Qualifying Investment for the purposes of Schedule 20 of ICTA 1988”.
Committee members will note that the amendment attempts in some detail to draw a more watertight definition of the words “recognised stock exchange.” The amendment would enable charities to continue to benefit from any investment by the charity that is a qualifying investment under schedule 20 to the Income and Corporation Taxes Act 1988. There appears to be no reason why charities dealing with substantial donors should be prevented from making qualifying investments that should surely be unexceptionable.
Amendment No. 88 would leave out the words “which is wholly” on page 40, line 23 and insert
“of which 50 per cent. or more of the shares is”.
Subsection (8) exempts transactions with trading subsidiaries from the new legislation. That exemption is arguably too narrowly drawn and should be extended to companies where the charity owns 50 per cent. or more of the company’s shares. Again, however, I should be interested to hear the Paymaster General’s view.
Amendment No. 89 would delete lines 1 to 6 on page 41 and insert
“(4) Subsection 3 of section 506A shall not apply to any transaction to which subsection 4 applies.’.”
The Charities Tax Reform Group believes that the amendment will “restrict the damage” that would otherwise be caused by subsection (3) of proposed section 506A if the Government will not accept amendment No. 83, which proposes to accept subsection (3). Committee members will recall, if they are exceptionally alert, the argument made a moment ago that subsection (3) is widely drawn.
Amendment No. 90 would insert a procedure that would provide an advance clearance procedure for charities, so that they can check whether potential transactions comply with new requirements of the legislation. If the Paymaster General is unwilling to accept the amendment, it would be helpful if she were able to give an assurance that charities seeking advance clearance on transactions would, in practice, be able to obtain advice from the HRMC. I imagine that she will be able to do so.

Rob Marris: Before the hon. Gentleman deals with amendment No. 91, which is, in a sense, separate from amendment No. 90 and some connected amendments, can he tell me his preferred batting order if the Government were to accept these contradictory amendments? I think that he would accept that they are contradictory, or could not all be accepted, especially those dealing with subsections (3) and (4) of proposed section 506A. His amendments could not all be incorporated in an Act that made sense, because some of them delete bits to which others refer.

Paul Goodman: If I may quote the Economic Secretary earlier, that is a very interesting question. I cannot answer it until I hear what the Paymaster General says. I accept that the amendments do not all lead in the same direction. They are probing amendments designed to draw a response from the Paymaster General. I am unwilling in principle to press them to a Division, but I first want to hear what she says before I make it absolutely clear that I shall not.
The hon. Gentleman said that I was about to explain amendment No. 91, which would delete the words:
‘by reference to gifts made at any time’,
and insert
‘only by reference to gifts made on or after that date’.
As it stands, under the proposed section, the new provision should have effect on transactions occurring on or after 22 March 2006. In other words, it has a retrospective element. However, charities will not have time to upgrade their record-keeping requirements. They may not be aware that they are entering into transactions with people who qualify as substantial donors. The amendment would ensure that the rules apply only to transactions with donors who become substantial donors by reference to gifts made on or after 22 March, so that the charities can implement new systems of record keeping.

John Butterfill: I should perhaps state at this stage that I am advised that I may continue to chair the proceedings on these amendments, despite the fact that I am a trustee of three national charities and one substantial local charity. However, I have taken advice and I hope that the Committee will be happy with that.

Philip Dunne: I am grateful, Sir John. I should also declare that I am a trustee of, I suspect, less august charitable organisations than your good self.
I support in particular amendment No.91, which covers the retrospective nature of the proposals. I have no difficulty with the intent of the Government’s proposals to tighten up the provision to avoid potential abuse. However, they need to consider the practical nature of the definition of substantial donations, which goes back more than sixyears.
I will illustrate my argument from my experience as a former trustee of the Juvenile Diabetes Research Foundation, which is a worthy charity raising hundreds of millions of pounds globally each year. In the UK, it raises at least a couple of million pounds each year mostly from annual walks, which take place in cities throughout the country.
There are several examples of teams put together by individuals or families, often connected with diabetes, which raise several thousand pounds each year from sponsored donations and contributions. Many could qualify, on a cumulative basis, as substantial donors. However, it would be a difficult challenge for the charity to unravel the records of the many thousands of donations of what are currently sub-£1,000 amounts. Although the Paymaster General may respond by saying that the provision applies only to donations of £100,000 and that most charities will have records adequate to pick up large donations, I am not convinced that charities such as that which I gave as an example will have good enough record keeping to enable them to make that aggregation. A simple solution to the problem would be to accept my hon. Friend’s amendment, so that the legislation would take effect from the date of the Budget without requiring many charities to go to a great deal of time-consuming effort for no benefit to themselves and potentially very little to the Exchequer.

David Gauke: I, too, should like to speak to amendment No. 91. I have a particular concern that I hope the Paymaster General will address. As the Bill stands, how far back would charities need to look through their records? My hon. Friend the Member for Ludlow (Mr. Dunne) referred to six years, but I am concerned that it might be necessary for them to look back 11 years. I say that because the wording of new section 506A, subsection (2)(b)—[Interruption.] It has clearly caused a reaction somewhere, either in this world or another.
There is reference to £100,000 over a six-year period, and then to the following five chargeable periods. If donations were made between 1 January 1995 and, for argument’s sake, 1997, the six-year period in which the £100,000 would fall would run until 1 January 2001. At that point, we should apply the following “five chargeable periods”—that is the following five years—which takes us to 11 years after 1995. To amplify the point that my hon. Friend just made about the need for charities to look back, the way I interpret the clause is that the need for amendment No. 91 seems to be all the more significant. I shall be grateful for clarification from the Paymaster General.

Julia Goldsworthy: I shall be brief. The clause seeks to deal with the abuse of charity tax reliefs, and we support the Government’s efforts to tackle that. It could prove to be an effective defence for charities that are trying to resist donors who want to attach strings to their gifts, and that is very important. As the intricacies of the Bill and the amendments show, relationships between charities and their donors can be very complicated, as the political parties are learning at the moment. What is the extent of the abuse that the clause seeks to overcome, and will it create further difficulties? Will it catch charities and donors inadvertently? I think in particular of the examples that have been given of charities that will have to look back at their records of regular donors to see at what point they might have become significant donors. I shall be grateful for clarification from the Paymaster General.

Dawn Primarolo: Good afternoon, Sir John. I compliment the hon. Member for Wycombe (Mr. Goodman). This is a complex set of amendments, and he advanced his arguments very clearly. He made it clear that they are probing amendments, and acknowledged that there are issues to be dealt with, as did the hon. Member for Falmouth and Camborne.
I should like to start by answering the hon. Gentleman’s questions about the National Trust. He looked perplexed as he was making his statements and I was startled. There were two points. The first concerned a charity that pays more than the market rate. I have to say that any charity that did that would be in breach of charity law; such a situation has nothing to do with the Bill. If he wishes to make the point differently after the debate, I would be happy for him to write to me. As I am sure Members would all agree, however, 99.9 per cent. of charities do not undertake that type of planning, and they comply with the generous reliefs that apply. Secondly, he asked about tenants in historical premises. My understanding on that point is that contractual arrangements will not be caught by the new rules—that is clear.
The two points made by the hon. Gentleman go to the heart of the difficulties with the clauses and to the substantive debate on them, so I should like to remind Committee members why the provisions are necessary. I assume that the hon. Member for Falmouth and Camborne wants to know how much abuse there is already. Substantial donors either make payments or transfer assets to charities, and then receive back money, shares or property. Reliefs in the form of gift aid payments or share relief payments are then triggered depending on which of those applies. Having obtained the relief, the donor then gets back a loan that may, for example, carry no repayment schedule with it—in fact, the charity may not want to be paid back at all. So the substantial donor status is used as a money box to attract more reliefs, which is clearly not a charitable function. I think that that is scandalous and despicable.
In its reaction to the proposed provisions the charity sector has made it clear that it takes the same view. I agree with the Charity Finance Directors Group when it said:
“It is essential that the charity brand is protected and not tainted by association with tax avoidance schemes.”
Furthermore, the Charity Reform Group said that it
“strongly welcomes the introduction of measures to prevent the exploitation of tax reliefs for charities by substantial donors for their own benefit”
—rather than that of the charity. I could go on with a long list of important organisations that have commented.
I shall deal in turn with each of the hon. Gentleman’s substantive points on the amendments and explain why the Government regard them as unnecessary, because it seems to me that the amendments are based on a misunderstanding of what the clauses seek to achieve. There was some recent unfavourable coverage in the magazine Charity Finance, but I do not believe that the fears that have driven the drafting of the amendments will materialise.
The trigger comes not when the substantial donor makes a payment or transfers property to a charity. The trigger comes if there is then a relationship between the charity and the substantial donor, whereby something comes out of the charity. That is what starts the clock. The terms are not unfavourable for the charity, but they are most definitely favourable for the substantial donor, and that is not the point of the charity reliefs and their support.
The point of the charitable reliefs is to assist people in charitable giving and to enable that to happen, not to allow wealthy individuals to find ways of getting reliefs to which they are not entitled and damaging the process or, as the hon. Member for Falmouth and Camborne said, attempting to apply undue pressure on charities in order to get that advantage.

Brooks Newmark: Although I cannot but agree with the Paymaster General and support her substantive point, the use of slightly selective quotes concerns me. Yes, the Charity Finance Directors Group was complimentary about the measure, and so was the Charities Tax Reform Group, to which the Minister referred, which said:
“While CTRG strongly supports measures to prevent the tax reliefs for charities being abused, we are concerned that it will become a responsibility on the charity to police transactions entered into with substantial donors and it will be the charity that could face a tax liability where it fails to do so even if innocently.”
It is the “innocent” matter that my hon. Friend the Member for Wycombe and the Charities Tax Reform Group raised.

Dawn Primarolo: I shall come to those points, and the amendments, in a moment. I shall be careful here because our debates have an important audience that we want to reassure.
I say to the hon. Gentleman, first, that charities understand their obligations under charity law and they ensure that the transactions that they undertake are in the best interests of the charity. Those organisations are equally able to understand—although they may be subject to pressure, on which I cannot comment—when they are making what is in effect an unrelievable transaction or one that is clearly not to the benefit of the charity. That is what is at the heart of the proposal.

Brooks Newmark: Will the hon. Lady give way?

Dawn Primarolo: If the hon. Gentleman will let me make progress on the amendments he will see that his fears about whether innocent transactions will be caught or about the requirement for more record-taking and so on are unfounded, and I will try to reassure him.
In terms of possible loss, it is very difficult to give a precise figure because much of it would not necessarily be reported to HMRC, but on the basis of the information that HMRC currently has, £60 million of reliefs are finding their way to being used in that avoidance mechanism. It is in the best interests of charities and of taxpayers that that loss of revenue is not seen either to increase or to close off the opportunities, as the amendments propose.
Quite the reverse of the points that have been made in the debate, the measure protects charities because it makes it clearer under what circumstances they can make transactions. Those transactions that fall outside those circumstances are not therefore relievable, although they are not supposed to undertake any transactions as charities that are not in pursuit of their charitable aims, so there is a little mixing of the pot.
As an experienced Chairman of our Committees, Sir John, and of the charities on behalf of which you are very active, you will know that charities are extremely careful to ensure that they comply with charitable law, in the best interests of their objectives, unlike individuals who may just want extra money from the taxpayer to which they are not entitled.
Amendments Nos. 77 and 79 deal with the sale or letting of property or the provision of services by a charity to a substantial donor. There is no exception for the provision of property and only a limited one for services provided by a charity as part of its primary charitable purposes. However, a charge would only arise on a charity under proposed section 506A(4) where the terms of the transaction are less beneficial to the charity than would be expected in an arm’s length transaction—and then, only the difference in terms. So, this is saying to a charity that it should make sure it does not make transactions that are actually less beneficial to it. Amendments Nos. 77 and 79 replicate that effect, so they are unnecessary, as provision has already been made.
Amendments Nos. 78 and 80 deal, as the hon. Member for Wycombe said, with the sale or letting of property, or the provision of services, by a substantial donor to a charity. Expenditure by a charity on such transactions is treated as non-charitable expenditure by virtue of proposed section 506A(3) and will result in a restriction of the charity’s tax exemptions. An exception removes the charity from such treatment where it is purchasing property or services from a substantial donor’s business—we are not saying that there is no relationship—on terms that are no less beneficial to the charity than the arm’s length terms; that is, the same as everybody else. The intention is to ensure that most commercial transactions between a charity and a substantial donor are not caught.
Amendments Nos. 78 and 80 have the opposite effect. As we discussed, their effect is entirely contradictory by ensuring that clause 54 catches only transactions that are more beneficial to the charity than the arm’s length terms, and lets out the very transactions that the clauses are designed to stop—namely, those that are on terms detrimental to the charity. I think the hon. Gentleman acknowledged that that may have been down to a drafting error when he made the point that he was really seeking clarification, as we go through the various subsections of proposed section 506A, on what exactly happens there.
Amendment No. 81 seeks to prevent exchanges of property between a substantial donor and a charity from being caught by the rules. As with amendments Nos. 77 and 79, it is unnecessary as a charge will arise under proposed section 506A(4) only in relation to an exchange of property where the terms of the transaction are less beneficial to the charity than the arm’s length terms.
Amendment No. 82 seeks to ensure that any transaction involving investments would qualify for relief under schedule 20 of the Income and Corporation Taxes Act 1988 and will not be caught by the new rules. I am afraid that I could not support such a change. Schedule 20 provides charities with a list of qualifying investments and loans that are acceptable for charity investment. While that works well for most charities, it is at times open to abuse by controlled charities. Clause 54 imposes additional protection, trying to ensure that such abuse cannot occur.
Amendments Nos. 83 and 84 seek to remove entirely the charging provisions from the legislation. Hon. Members will not be surprised to hear that I am not at all attracted to that idea. It would leave legislation that would have no effect. I am trying to convey to the Committee how important it is as a matter of principle for charities and for the continuation of security that those who give to charities believe that they will have.
Amendment No. 83 removes section 506A(3). That is the principal charging mechanism in clause 54. If I accepted the amendment, which I will not, HMRC would be unable to restrict a charity’s tax exemption where it entered into a transaction with a substantial donor that is not otherwise accepted. Instead HMRC would be forced to rely on the application of section 506A(4) to penalise such behaviour. However, amendment No. 84 also calls for the removal of section 506A(4), which is the secondary charging provision. The legislation would be effectively gutted. I have tried to make it clear why clause 54 is necessary to prevent the abuse of the charity reliefs.
Amendment No. 85 is intended to ensure that employees of a charity are able to donate large sums to the charity without being designated as substantial donors. I cannot accept the amendment. An extension of the rule that prevents a payment of remuneration for services as a trustee is on the face of it reasonable, but the rules are targeted at those who abuse the reliefs. Providing for the payment of employees not to be caught would enable artificial employments to be created by those still seeking to abuse the charitable relief.
Charitable workers are not always the most well-paid people. It is almost a vocation. The individuals concerned are making a huge contribution. In looking across the work of charities and how much they pay and whom they employ I do not see that the problem could arise and so it increases my anxiety that ghost employment might be created here in order to create a category of employees.

Paul Goodman: The Paymaster General said that she was minded not to accept amendment No. 85. She said that the rules are targeted at those who abuse the reliefs. But will the proposed changes also catch those who do not abuse the reliefs? If so, what justification is there for that?

Dawn Primarolo: I was going to come to the point about those who do not abuse the reliefs. I touched on it in my opening remarks. If the charities are behaving according to charity law and are acting in the best interests of their charitable objectives, they cannot innocently have been in a transaction of this type because they would have noticed that they were paying or transferring value to a substantial donor that would not have been in the best interests of the charity. That comes back to the point about record keeping. Charities know well enough what they are doing. The overwhelming majority will have no concerns about the clauses. Although it is unfortunate, it sometimes happens—thus the requirement on HMRC.
There are some who, to put it politely, have the wrong end of the stick about what is happening. They have raised a number of questions in the amendments. I can understand why charities would be fearful if such concerns were well founded, but they are not. Those who have moved the amendments are mistaken. That is why I am taking as much care as I can in responding to give assurance that the fears underpinning the amendments—more record-keeping, taxation of innocent transactions, restriction of charities—are ill-founded. The hon. Member for Falmouth and Camborne hit the nail on the head when she said that the legislation will actually stop the pressure that might be applied to charities by those who might seek to achieve an advantage for themselves.
Since 1997, the Government have given great care to such questions. I have a long list of all the legislation, changes in tax and work that we have done with the charitable and voluntary sector. I shall not read it out, but it cannot be disputed that we have done everything possible at every point to assist charities and charitable giving.
Amendment No. 86 aims to ensure that when a substantial donor sells or leases property or provides services to a charity, such transactions will be excepted where the transaction takes place at arm’s length. Again, I cannot accept the amendment. As I mentioned in relation to an earlier amendment, proposed new section 506B(1) contains an exception that will ensure that the sale or letting of property or the provision of services by a substantial donor will not be caught by the rules where they are provided in the course of the substantial donor’s business on terms that are no less official to the charity than the arm’s length terms. The overwhelming majority of such transactions will take place in the course of a donor’s business. The exception in section 506B(1) strikes the balance between eliminating the avoidance risk and ensuring that innocent commercial transactions entered into by charities are not caught. We are trying to do precisely what the hon. Member for Wycombe suggested.
Amendment No. 87 seeks to extend the investments that a charity can make in a donor’s business to include shares and securities listed on a market recognised by the European Union, securities admitted to trading on the alternative investment market and any investment that is a qualified investment for the purposes of schedule 20 to the Income and Corporation Taxes Act 1988.
The existing exemption in section 506B(4) prevents investments in shares or securities listed on recognised stock exchanges from being caught by the new laws. Such an exception is drafted widely enough to prevent the most common charity investments from being caught. Although extending the list of investments to include those in the European Union list sounds desirable, I do not believe that there is a material difference between the lists of exchanges maintained by the European Union and those on the list of recognised stock exchanges.

Helen Goodman: I am not clear about how that will work in practice. It would be usual for a charity to hand over its investment responsibilities to a bank. It would agree an overall strategy but, having handed matters over to a bank, would not be involved in detailed decision making on individual investments. However, the managing bank might invest in a portfolio that included someone who had made an donation. Will my right hon. Friend clarify that that situation will not be caught by the clause?

Dawn Primarolo: That would not be caught because such matters would be part of the charity’s usual business when pursuing its objectives. We thought that the particular abuse in a small number of cases had been made clear to the charitable sector in respect of the relationship between the substantial donor and the charity in the sense of money shares, property going in and benefit coming directly out to the individual.
I was trying not to jump around in respect of the amendments, but the donation could have made to the charity by a substantial donor and the benefits be yet to be acquired. The provision would make sure that those benefits could not be acquired, though substantial donors had still given money to the charity that had received the necessary relief. We should applaud the donors for that, but they will not be receiving benefit as a result of the provision. Confusion arises under amendment No. 91 about whether the action is retrospective. I am sure that members of the Committee are not suggesting that, when someone has already arranged for a completely unacceptable use of charitable reliefs, we should allow it to continue. As I said, that is triggered by what happens to what comes out of the charity—hence, the period of six years.
Mr. Gaukerose—
Mr. Dunnerose—

Dawn Primarolo: I have got out of order. I am happy to go straight to amendment No. 91. The issue is about what happens in the case of the charity with an interest or property that it invests in an individual’s company at a high rate, but receives a poor rate of return, and it is absolutely transparent to everyone that that is the case. That is not really something that we expect charities to feel it necessary to do in pursuit of their charitable objectives, nor should they.

David Gauke: I wanted to intervene in case the Paymaster General was about to conclude her remarks.

Dawn Primarolo: Good grief, no.

David Gauke: That comes as a relief to us all. I wanted merely to question the point about whether the time was five, six or 11 years. The worry that some of us have is about the bureaucratic burden that may fall on charities to check previous donations to ensure how far back they need to go to be confident that they will not be caught under clause 54.

Dawn Primarolo: I do not know whether the hon. Gentleman is struggling with the idea that somehow a charity does not know that it is about to invest in a company that has been triggered. The charity might choose that company because it is wholly owned by a substantial donor or is receiving a substantial loan with no repayment details and an understanding that the loan will be struck out. I cannot believe that a charity will not know clearly the relationship between the substantial donor and the proposed transaction.
The issue that the hon. Gentleman raised was about innocents being affected. The transactions in question may be acceptable in the best interests of the charity if they trigger reliefs in pursuit of charitable objectives and in the course of the substantial donor’s “normal business,” or if the charity might have had the same relationship with any other company without a substantial donor. I am trying to be clear and reassure the Committee that the aim is to target mischief, not to prevent charities from working. The question of the time involved is difficult. In exceptional circumstances, the HMRC has seen that, in such schemes, there might be quite a long gap between resources going in and benefit coming out.

Julia Goldsworthy: I understand that the target of the regulations is charities that are consciously exploiting loopholes and seeking to benefit a major donor. Will the Paymaster General accept that there are charities with substantial major donors that are acting perfectly within the law but will now have to take on an additional burden of compliance?

Dawn Primarolo: No, I cannot accept that. We are discussing a very narrow set of circumstances. If a charity is complying with charity law and the requirements of its charitable status, all its transactions should comply with them. That is true particularly if the charity is accessing reliefs that are specifically for charitable purposes.
We are discussing whether the transactions in question should enable access to reliefs. If hon. Members can give me specific examples—it does not have to be done today—I will certainly consider the issues raised. If examples cannot be provided, with an explanation of why the people involved should not be covered by the measure or should be because they are committing the abuse that we are trying to deal with, I cannot address the more general matter of whether innocents will be caught. I say to the Committee and those who listen to our proceedings that if they have more information than they have provided us with to date, they should come forward with it. Our current information is not detailed enough.

Philip Dunne: I seek to give such an example. My concern relates solely to subsection (1)(d) in proposed new section 506A on
“the provision of services to a charity and a substantial donor”.
There might be individuals who are not substantial donors, but who are providing services to a charity, such as their own time for lay review on a charity’s medical committee. Individuals whose donations differ from year to year may suddenly become beneficiaries of a windfall, have substantial funds to make available to a charity and then make a substantial donation. As a result, their relationship might be caught under the provisions in clause 54.
Under proposed new section 506B(1), it will be for the HMRC to determine whether a transaction is caught by those provisions. I am concerned about record keeping, as is the hon. Member for Falmouth and Camborne. For reasons with which all Members will sympathise, we are placing an obligation on charities that extends way beyond what is necessary to restrict dubious transactions, which the Paymaster General is rightly seeking to do.
The Paymaster General might say that my example is not relevant and that such relief will not apply because it will be caught by the exemptions. Surely, however, that does not obviate the need for the charities to continue to keep records of individuals who might become substantial donors. I do not have a problem with that going forward, but there is a problem if charities have to look back through the records for anybody who might subsequently be caught under the clause.

Dawn Primarolo: I disagree with the hon. Gentleman entirely. Fundraising charities know who their major donors are; that is good fundraising practice. They keep such records and invest a great deal of time and effort into securing their revenue, or future increases in it.
Proposed new section 506B(1) ensures that the
“sale or letting of property”,
or
“the provision of services...by a substantial donor”
will not be caught by the rules when provided in the course of the substantial donor’s business
“on terms which are no less beneficial to the charity than...a transaction at arm’s length”.
That draws the distinction in the relationship with a substantial donor with which we are trying to deal.

Helen Goodman: Does my right hon. Friend agree that there will not be a burden on charities of increased record keeping? Every year they submit their reporting accounts to Companies House, at the back of which must be an annexe listing all donors, including donors substantially below the level set out here. Furthermore, they are required to keep copies of those accounts going back either seven or 10 years—I cannot remember which. Certainly, that covers the proposals in the clause.

Dawn Primarolo: I agree with my hon. Friend. In my experience, charities are very thorough about knowing who their substantial donors are and about ensuring the best possible outcome in the interest of their charitable objectives. That matter is being confused here. The issue is not whether they have a relationship with substantial donors for the provision of businesses or services, but that that is conducted in a transparent way. I know of no charity that does not drive a hard bargain in seeking to get services, provisions or support in the best possible circumstances for that charity and its purposes. They are excellent at it, and a jolly good job too. That is part of making sure that their resources are efficiently used.

David Gauke: I come back to this question of timing. The Paymaster General may be pleased to know that I will approach this from a slightly different tack and for argument’s sake I fully accept her point that clause 54 relates only to dubious transactions that should be picked up. If the donations were made in 1996, 1997 or 1998 and then the payment under subsection (3) or the transaction at less than arm’s length value in subsection (4) occurs in 2006, will the clause be effective in dealing with that? In other words, will it deal with mischief going back 11 years or does it go back only five or six years?

Dawn Primarolo: In all truthfulness it is feasible that there could be limited circumstances in which it could go back 11 years. The hon. Gentleman suggests that the abuse has gone on for a much longer period of time and is much more widespread than HMRC believes. HMRC’s view will be based on information and knowledge that it collects in running the tax system on our behalf. I cannot give the hon. Gentleman an absolute assurance that there might not be exceptional circumstances and some charities might be in that position. In those circumstances, they would need intensive support and clear guidance from HMRC, but that happens in the tax system in exceptional circumstances.

David Gauke: My point was merely a question of interpretation as to what the clause is saying. I think that the Paymaster General has clarified that. Because of the £100,000 over six years, it may be possible to look back 11 years. That is a point that charities will need to bear in mind, whether they are acting mischievously or otherwise.

Dawn Primarolo: The best way to avoid that is not to engage in those arrangements from now on. Charities will then not have to look back, so the issues that the hon. Gentleman raises will not need to be addressed. This rather flexible use, perhaps unintentionally, of retrospection came in because it is the second part of the transaction when that is triggered.
I shall not speak to the Government amendments. The hon. Gentleman and others have welcomed them and it was necessary for the Government to make them. I hope that I have assured the Committee—

George Young: On Government amendment No. 63, which as the Paymaster General said is welcomed by registered social landlords, can she confirm that the Treasury cleared it with the Housing Corporation and that those transactions that will now be exempted by the Treasury will not be caught by the Housing Corporation objecting to substantial donations being made by a housing association to a charity that it set up?

Dawn Primarolo: I apologise to the right hon. Gentleman. I cannot answer that detailed question. It is an important point and I wish that I had thought of it. I will write to the right hon. Gentleman and give every Committee member a copy of the letter. I shall keep my fingers crossed that that is all in order, as it was precisely because of the interaction with controls and regulations that it was felt that these changes could be made. I do not quite have the confidence to give the right hon. Gentleman a straight yes answer this minute. [Interruption.] With the elapsing of 30 seconds, I am apparently able to answer yes, but I should still like to consider the matter and write to the right hon. Gentleman, because it is an important point.
In conclusion, I hope that I have been able to convey to the Committee that the Government took great care with this legislation and did their best to obtain the correct balance between trying to stop the abuse of the reliefs and ensuring as much as possible that the law-abiding charities were not affected by these changes. I hope, therefore, that the hon. Member for Wycombe, in the spirit that he moved the amendment, will not press the amendments today, even if he wants to reserve his position on some of the answers I have given. I hope that he is reassured on a number of points.

Helen Goodman: I am grateful to the Paymaster General for the way in which she responded in her marathon speech that would otherwise have been the responsibility of the Economic Secretary. She suggested, at the start of her response, that some of the objections by the Charities Tax Reform Group may have come rather late and may work contrary to the general welcomes of other organisations, which I mentioned on moving my amendment.
Reservations have been expressed by others, including the Law Commission and the Chartered Institute of Taxation, as I said, but generally the Paymaster General sought, having listened to concerns about innocent transactions being caught, to say either, “Innocent transactions won’t be caught and I give guarantees and assurances”—which were welcome—or that some of the examples given should be exceptionable transactions. My hon. Friends and I still have some reservations about her response, particularly to amendment No. 91 on substantial donors. She argued that charities know who their substantial donors are. However, there may be a donor who is a substantial donor, who later, for one reason or another, stops being one, or there may be a donor who was not a substantial donor, who later becomes one. That takes us back to issues about bookkeeping and how far back charities will have to look.
We will not press the amendment to a vote. We heard the Paymaster General’s reassurances, but there may be some matters to which we will wish to return in due course. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 62, in page 40, line 21 [Vol I], leave out ‘value' and insert ‘limit'.
No. 63, in page 40, line 25 [Vol I], at end insert—
‘(9) A registered social landlord or housing association shall not be treated as a substantial donor in relation to a charity with which it is connected; and for that purpose—
(a) “registered social landlord or housing association” means a body entered on a register maintained under—
(i) section 1 of the Housing Act 1996,
(ii) section 57 of the Housing (Scotland) Act 2001, or
(iii) Article 14 of the Housing (Northern Ireland) Order 1992, and
(b) a body and a charity are connected if (and only if)—
(i) the one is wholly owned, or subject to control, by the other, or
(ii) both are wholly owned, or subject to control, by the same person.'. —[Dawn Primarolo.]

Clause 54, as amended, ordered to stand part of the Bill.

Clause 55 ordered to stand part of the Bill.
Further consideration adjourned.—[Mr. John Heppell.]

Adjourned accordingly at eleven minutes past Four o’clock till Tuesday 23 May at half-past Ten o’clock.